Working Paper No. 657

What Does Norway Get Out Of Its Oil Fund, if Not More Strategic

Infrastructure Investment?

by

Michael Hudson Levy Economics Institute of Bard College

March 2011

The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals.

Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad.

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Copyright © Levy Economics Institute 2011 All rights reserved

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ABSTRACT

For the past generation Norway has supplied Europe and other regions with oil, taking

payment in euros or dollars. It then sends nearly all this foreign exchange abroad,

sequestering its oil-export receipts—which are in foreign currency—in the “oil fund,” to

invest mainly in European and US stocks and bonds. The fund now exceeds $500 billion,

second in the world to that of Abu Dhabi.

It is claimed that treating these savings as a mutual fund invested in a wide array

of US, European, and other stocks and bonds (and now real estate) avoids domestic

inflation that would result from spending more than 4 percent of the returns to this fund at

home. But the experience of sovereign wealth funds in China, Singapore, and other

countries has been that investing in domestic infrastructure serves to lower the cost of

living and doing business, making the domestic economy more competitive, not less.

This paper cites the debate that extends from US 19th-century institutional

doctrine to the approach of long-time Russian Chamber of Commerce and Industry

President Yevgeny Primakov to illustrate the logic behind spending central bank and

other sovereign foreign-exchange returns on modernizing and upgrading the domestic

economy rather than simply recycling the earnings to US and European financial markets

in what looks like an increasingly risky economic environment, as these economies

confront debt deflation and increasing fiscal tightness.

Keywords: Sovereign Wealth Funds; Norway; Oil Fund

JEL Classifications: H27, H50, H54, H60

For the past generation Norway has supplied Europe and other regions with oil, taking

payment in euros or dollars. It then sends nearly all this foreign exchange abroad,

sequestering its oil-export receipts—which are in foreign currency—in the “oil fund,”

to invest mainly in European and US stocks and bonds. The fund now exceeds $500+

billion, second in the world to that of Abu Dhabi.1

What do Norwegians get out of these financial savings, besides a modest

interest and dividend yield? The export surplus is said to be too large to spend more

than a small fraction (a Procrustean 4 percent) at home without causing inflation. As

an excuse for placing its export savings merely in the way that a middle-class family

would do—buying an assortment of foreign stocks and bonds—the oil fund’s

managers conjure up images of squandering spending on projects such as Dubai’s

trophy skyscrapers and luxury real estate sinkholes.

So foreigners get not only Norway’s oil, but also most of the royalties and

earnings from its production. Along with OPEC oil funds, the volume of these natural

resource royalties is so large that they are largely responsible for supporting stock

market prices in Europe and the United States (along with pension fund inflows).

Meanwhile, Norway spends little on itself. Even now that its financial managers are

beginning to worry about how risky the stock markets are becoming (having lost money

in a number of recent years) and feel the need to diversify into real estate, they still

warn against investing the oil fund’s wealth to build up the domestic economy.

What seems ironic is that while Norway is sending its savings mainly to

European and US financial markets, money managers in these countries are sending

their funds to the BRIC economies (Brazil, Russia, India, and China). These are the

nations whose governments are investing their trade surpluses most actively to raise

their educational levels, productivity and living standards, and to upgrade their

infrastructure, especially their transportation. This in turn has raised the land’s site

value, spurring construction and widespread prosperity—while the US and European

economies are entering what looks like an extended period of austerity.

While investing at home to improve their quality of life, China, Singapore, and

other nations manage their sovereign wealth funds with an eye to shaping their 1 For a ranking and evaluation of the world’s sovereign wealth funds, see http://www.swfinstitute.org/

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economies for the next twenty, thirty, or even fifty years. They are buying control of

the key foreign technologies and raw materials deemed most critical to their long-term

growth. This broad scope invests export earnings directly to make their economies

more competitive while raising living standards.

This frame of reference goes beyond the purely financial scope of deciding

simply what foreign stocks and bonds to buy, or what real estate to take a risk on. It

shows that finance is too important to be left to financial managers. Their point of

reference is not how to develop an economy over time. It is how to make money

financially—and the financial frame of reference is the short run. The basic question

is which securities will yield the highest rate of return or rise most quickly in price.

This is a short-term decision, given the increasingly frenetic ebb and flow of today’s

financial markets.

The financial vantage point also is indirect: stocks, bonds, and bank loans are

claims on the economy’s assets and income, not tangible wealth itself. That is what

makes financial markets so risky—especially today, when almost-free US credit

enables banks and hedge funds to use debt leveraging to bid up prices for stocks,

bonds, and foreign currencies. Norway’s oil fund has tried to minimize risk by

“spreading it around,” buying small proportions of companies rather than direct

control. But when stock or bond markets become debt burdened and shaky, spreading

the risk does not diminish it.

The result is like trying to buy milk from a broad scattering of farms around

Chernobyl so as to avoid radiation poisoning. This may distribute the risk more

broadly, but has little effect on minimizing it. What many Norwegian financial

managers view as spreading the risk over a wide spectrum of foreign stocks and bonds

therefore merely distributes it more evenly across the board—in what today is an

increasingly risky global environment.

The major financial risk today is that real estate, governments, and companies

went so deeply into debt during the Bubble Economy years that they now are suffering

negative equity. Central banks have sought to reinflate asset prices by lowering interest

rates. Flooding the financial markets with credit has lowered returns so much that

money management fees absorb a large share of Norway’s modest oil fund returns. And

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it is only natural for financial and real estate brokers to applaud the idea that it would be

inflationary for Norway to do what the most successful growth economies are doing—

using its export earnings to benefit its own economy in decades to come by buying

direct control of global resources.

Norway has produced and exported millions of tons of oil and employed a

substantial portion of its labor force to build up its oil fund. This oil often is treated as a

“gift of nature,” but entire towns have been involved in the construction of oil platforms

and related capital infrastructure that has made Norway a world leader in deep-sea

drilling. So the oil fund is a product of labor and industry as well as nature.

Understandably, many Norwegians are asking what their economy should get out of all

this resource depletion, and labor and capital investment to extract and ship North Sea

oil. As matters stand, foreign countries not only have Norway’s oil, their financial

markets also have received its $500+ billion in savings as a capital inflow

These savings have helped pump up US and European stock and bond prices,

and are now being used to help revive their real estate markets as well. In fact, it is

largely the sovereign wealth funds of Norway and other oil exporters—along with

pension funds throughout the world—that have bid up stock and bond prices over the

past few decades.

Little of this financial churning adds to the real capital stock of economies. The

financial sector has become decoupled from tangible capital formation; most of the net

stock purchases are from financial managers exercising their stock options and venture

capitalists “cashing out.” When these institutional buyers begin to sell, the outflow of

funds may lower prices—and markets always plunge downward much more rapidly

than they rise.

Given this situation, how should Norway best maneuver?

For starters, its government has a broader option than merely to steer savings

into foreign financial markets. It enjoys sufficient scale to use its savings—and

domestic credit creation—to improve the economy by creating tangible means of

production to raise productivity. Using the experience of other sovereign wealth funds

as an object lesson, Norway may ask how its approach compares with that of China,

Singapore, and other countries that are using their enormous financial savings

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strategically and diplomatically?

Rather than investing in foreign financial markets—which today are staggering

under their debt load—sovereign wealth funds in Asia are looking at the long-term

national interest. Working in tandem with leading industries, they draw up long-term

plans to forecast what raw materials and technology their economies may need. They

then take a direct ownership position rather than scattering their savings over a cafeteria

selection of stocks and bonds.

This kind of long-term planning is how the world’s leading economies grew

rich: Britain in its mercantilist epoch, the United States in its protectionist industrial

takeoff after 1861, and state-led Germany after 1879. Business was nurtured largely by

government contracts, infrastructure spending, and subsidies. And rather than being

inflationary, public investment enabled economies to minimize their cost of living and

doing business.

Countries that are passive let markets be shaped by nations that manage

their economies with a view toward maximizing their own national welfare and

future. British, French, and Dutch mercantilism viewed government planning as

aiming to maximize social well-being over time, whereas financial planning aims

merely to make money—as easily and quickly as possible. Norway’s oil fund is

managed mainly in financial terms, not one of broad forward planning for economic

development. The problem with this approach is that in today’s world this financial

drive takes the form of debt-leveraging—loading down economies with debt, and

ending by stripping assets as public regulation is loosened, and asset-price inflation

is applauded as veritable “wealth creation.”

I. SHOULD SOVEREIGN WEALTH FUNDS AIM AT BUILDING FINANCIAL OR

TANGIBLE “REAL” WEALTH?

There are two approaches to how governments may manage their sovereign wealth funds.

For simplicity, these can be called the passive and active approaches. The present approach

is passive, inasmuch as it works within the existing economic structures and the financial

time frame is inherently short term in scope. Norway consigns its oil earnings to money

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managers to invest to buy stock or bond ownership abroad without linking these purchases

to its own future development, except by receiving a modest foreign exchange return.

Norwegians meanwhile are selling off ownership of domestic mines and other natural

resources as well as new technology, bringing in yet more foreign exchange on top of its oil

exports. Most notably, it is selling these resources to nations that are seeking to dispose of

their own surplus dollars and euros like an unwanted hot potato.

The more active approach sees the government’s duty as being to develop

the domestic economy to benefit its inhabitants. This is done by building up

infrastructure, including education and public healthcare, research and

development, and investment in transportation, power generation and distribution,

communications, and information technology.

The scope is global. China and Singapore, for example, start by asking what

their economies will need over the next half-century to upgrade their productivity,

technology, educational levels, and living standards. The aim is to improve their

competitive advantage, not accept present conditions as a “given.” Toward this end

they are investing in resources and technology that future generations will need to

control. China has bought majority ownership of mineral resources (including silica

mines in Norway and Iceland). In the financial sphere, it has bought into the

partnerships of major US hedge funds. Singapore’s Central Provident Fund,

TEMASEK, invests in Australia and neighboring countries, and Singapore Power

controls Australian power systems.

How “Free” Central Bank Credit Dilutes the Flow of Actual New Savings

Just as Norway’s climate is threatened by global warming caused by carbon pollution,

so its savings (and those of other countries as well) are threatened by free credit and

debt pollution as the financial climate has changed radically from when the oil fund

was established in 1990. Having built up this fund to over $500 billion mainly by

adding new export revenues each year, Norwegians naturally think of it as the product

of oil and gas sales and the efforts of the thousands of workers employed in the oil

sector over the past fifteen years or so. But an even larger sum of $600 billion recently

was created simply on computer keyboards electronically, by the US Federal Reserve

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Board as part of Chairman Ben Bernanke’s Quantitative Easing (QE2) policy. This

liquidity was provided to banks at only 0.25 percent—one-quarter of 1 percent. Its aim

was to enable US banks to earn their way out of the losses suffered from their bad

mortgage loans and other gambles during the 2001–08 bubble.

Why go to the effort of working and saving, when you can borrow at so low a

cost? One no longer needs to save in order to invest. A speculator or corporate raider can

go to a bank and ask it for a loan to bet on which way interest rates, exchange rates, and

bond or stock prices will move. The bank credits the customer’s account, in exchange for

an IOU. (So loans create deposits, not the other way around.) This credit creation reduces

Norway’s oil fund savings to the same plane as the bank credit now flooding the world in

search of investment opportunities.

This speculation is distorting the global economy. The flood of low-cost

central bank liquidity enables banks and their customers to borrow against any asset

yielding a higher rate of return, from computerized short-term arbitrage, options, and

swaps, or to take over entire companies. The logical end of this tendency is to

capitalize the entire economic surplus—corporate cash flow and disposable personal

income over and above basic subsistence levels—into bank loans, paying it out as

interest.

This debt-leveraged speculation leaves no retained earnings to invest in capital

renewal or new research and development, and therefore threatens to crowd out

tangible capital investment. The financial road ends by grinding economies to a halt—

and leaving governments with no more taxing power to pay for infrastructure or social

spending. This is the point toward which today’s financial system is moving. At the

point where the financial sector succeeds in loading down an economy with debt, the

economy collapses—as the Baltics have done, and as Third World countries did for

many years as a result of IMF austerity programs.

The moral is that the world’s banks and their clients want the same thing that

Norway’s oil fund wants: to make a financial gain. But they are doing the opposite of

what it is doing. Rather than putting their money into the US or European stock

markets, they are moving the Federal Reserve’s $600 billion of QE2 liquidity abroad, to

the BRIC countries and raw materials exporters (such as Australia) offering high

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interest rates and prospects for capital gains—economies not yet as highly debt-

leveraged as the US and European financial core. But given the fact that this free credit

creation is what inflated the recent bubble, one may well question how long it can

continue.2 For Norway, choosing to save financially means choosing between putting

its money in financial markets that seem doomed to enter the “Ponzi” phase of the

financial cycle—or spend its savings on its own domestic economy in a more tangible

way.

Why the Financial Core Encourages “Passive” Savings Policies Abroad

It is neither natural nor inevitable for nations to recycle their savings into the US and

European financial markets. When OPEC oil funds were first formed in the 1970s, this

financial practice was a response to US arm-twisting on OPEC rulers to recycle their

export earnings back to the US economy, in ways that did not involve taking direct

control of companies, technologies, or productive resources. So OPEC countries simply

bought stocks, relinquishing control over how the recipients of these savings spend the

money. To the extent that they accumulate large sovereign wealth funds, they are to act

as retail investors do—leaving control in US or Western European corporate offices and

government agencies.

This policy was explained to me in 1974, when Herman Kahn and I visited the

White House to discuss US international strategy in the wake of OPEC’s quadrupling of

its oil price after the United States quadrupled its grain prices. Jack Bennett, Under-

Secretary of the Treasury for Monetary Affairs, was the point man on this issue. I had

known him in 1965–66 when he was treasurer of Standard Oil of New Jersey (now

renamed Exxon), and taught me much of what I know about the oil industry’s balance of

payments and the organization of offshore banking centers and “flags of convenience,”

when I was working at Chase Manhattan writing a statistical analysis of the oil industry’s

balance-of-payments impact. Now, a decade later on my 1974 visit, Mr. Bennett

2 This new credit and debt creation raises the cost of doing business for two reasons: higher interest and amortization charges on debts that are kept on the books, and higher taxes paid by the “real” economy. This leaves less wage and profit income to be spent on goods and services. And when the financial expansion reaches its destructive end, governments are told to raise taxes to pay interest charges on the new public debt created to bail out the banks for the loans gone bad. Leaving them on the books rather than wiping them out subjects indebted economies to financial austerity and debt deflation.

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explained that the Treasury had told Saudi Arabia and other OPEC countries that as

sovereign nations they could of course charge what they wanted for oil (thereby creating

a high price umbrella for domestic US producers to reap resource rents)—as long as they

recycled their funds to the United States. As would be the case with Japan in the late

1980s, they were to invest passively, by buying shares on the stock exchange, not buying

America’s commanding heights comparable to what US and British investors owned in

the Oil Gulf. Not to do that, he explained, would be treated as an act of war. (Later, one

Saudi prince announced that he had bought one million shares of every stock in the Dow

Jones Industrial Average.)

Other oil states have followed suit, headed by Abu Dhabi, which holds the only

sovereign wealth fund larger than Norway’s. The result of recycling of oil earnings into a

broad selection of shares enriches the financial and real estate sectors of the world’s core

financial economies (the United States and Britain, followed by Germany and France)

more than the “real” economy.

Today’s Global Debate over How Best to Use Sovereign Wealth Funds

In the United States, Alaska and Wyoming pay their residents a “citizens’ dividend” out

of their resource rent receipts. Alaska’s Senators Stevens and Murkowski, as well as its

Governor Sarah Palin, did not believe that it is proper for government to upgrade,

educate, and provide the population with social services. So Alaska has used its oil

revenue to pay each resident a few thousand dollars—and to abolish property taxes. This

policy leaves Alaska among the lowest-ranking states in terms of literacy, education,

support for the arts and technology, while avoiding progressive taxation.3 The state’s

neoliberal anti-tax, anti-government ideology condemns its residents to send their

children out to work rather than educating them and investing in their improvement.

The Arab oil-exporting states and also Alberta, Canada, follow a similar

investment strategy to that of Norway, treating their oil savings in the way that a small

family would do. Alberta’s web site explains the Fund’s recent neoliberal shift in

investment philosophy:

3 For a description of Alaska’s sovereign wealth fund and its investment policy see http://www.institutionalinvestor.com/asset_management/Articles/2658908/Jeffrey-Scott-Forges-Trail-for-Alaskas-Sovereign-Wealth-Fund.html?p=1.

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In 1976, the government of Peter Lougheed established the Alberta Heritage Savings Trust Fund to finance economic diversification and cultural and social development in the province. During its early years, the fund received a portion of the province’s annual oil and gas royalty revenue. By 1987, the fund peaked at nearly $13 billion. Thereafter, it slowly declined under the impact of major spending commitments, including mega-projects such as Syncrude and Kananaskis Country, seed money for innovative small enterprises, and funding for the Alberta Heritage Foundation for Medical Research and the Alberta Heritage Scholarship Fund. Albertans’ attachment to the implicit economic security of the fund blocked a plan to dissolve it and pay down the provincial debt during the fiscal crisis of the mid-1990s. While critics have pointed to questionable investment strategies, the fund has achieved most of the realizable goals set for it.4

An ambitious initial plan was undone by later neoliberal governments; at least

Alberta saved and invested its rent revenue rather than paying it out to its residents. But

few oil exporters do what governments in the leading Western economies have done:

transform their society by putting in place technology to enable future generations to be

self-supporting rather than live as rentiers.

Russia is another case in point. Explaining why he opposed “the fetishization

of the Stabilization Fund—our beloved ‘piggy bank,’” former Russian Premier

Yevgeny Primakov (currently the head of Russia’s Chamber of Commerce) said in a

2009 interview that the aim was to release the money for primary needs. “Money

needs to be spent inside the country.” So Russia’s Stabilization Fund was divided into

the Reserve Fund and the Fund for Well-Being, which “was to be used to develop the

economy and for social needs.”5

But Russia was persuaded to follow neoliberal advice not to invest in

upgrading its industry, and long refused “to inject the capital being built up into the

real economy.” Instead of using the money “inside the country to diversify the

economy,” Russia spent its foreign exchange earnings on US Treasury bonds. As a

4 http://www.answers.com/topic/alberta-heritage-fund#ixzz1DsXx2640. The report of Alberta’s Heritage Fund provides more information: http://www.finance.alberta.ca/business/ahstf/annual-reports/2010/report.pdf. 5 “Former Premier Primakov on Global Crisis, Effects in Russia, Stabilization Fund,” Izvestia, May 8, 2009, translated in Johnson’s Russia List, May 8, 2009.

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result, Mr. Primakov warned, “Russia will most likely come out of the recession in

the second echelon—after the developed countries.”

The excuse for this economic negligence, Mr. Primakov noted, was a neoliberal

“fear of inflation,” above all the fear that wage levels and living standards would rise—

as if this were a bad thing! “They said that inflation would soar if what had been built

up began to be spent. At one of the representative conferences, I asked: ‘What kind of

inflation can there be in building roads? The work would just spur on production of

concrete, cement, and metal...’ But our financial experts have a monetarist view of

inflation. They are afraid of releasing an additional money supply into circulation.” The

problem, he concluded, was that “If the ministries are given the assignment of reducing

expenditures at their discretion, the first thing they sacrifice is scientific research and

experimental design development. However, research and development should be

classified as protected articles of any budget.”

What Mr. Primakov is criticizing is the same logic that Prime Minister Jens

Stoltenberg uses to claim that Norway should “build up reserves” for bad times to come.6

To import capital goods or technology, he warned, would involve inflationary domestic

spending—which would make Norway less competitive, threatening its long-term

employment. The Norges bank, statistical bureau (Statistisk sentralbyrå), and leading

academics have made this assertion so often over the past decade that advocates of

spending oil export revenues to upgrade the domestic economy are dismissed as populist

inflationists almost as a knee-jerk reaction here.

It is a bankers’-eye view of the world, not that by which Britain, France, Germany,

and the United States built themselves up to global leadership positions. The focus is on

financial returns, not on lowering the cost of living and production or upgrading the

quality of work. It views government spending as deadweight cost, not as productive

investment. It is as if the logic of Mr. Primakov and other foreign leaders going back a

century did not have a valid point in seeking to raise national productivity by importing

technology and obtaining key strategic foreign resources. Yet their logic is what powered

the United States, Germany, and other leading economies to their position of world

leadership in the 19th and early 20th century. It deserves a closer examination than the

6 In a feature article in the DN (Businesslife Daily), March 5, 2011.

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quick dismissal with which it is greeted by Norway’s financial planners.

The Logic of Public Investment Is to Upgrade Economies and Make Them More

Competitive

Nations that today have the highest incomes recognize that rising productivity should

enable costs and prices to fall—and that public investment is needed for this to occur.

US development strategy was based explicitly on public infrastructure investment and

education. The aim was not to make a profit or use its natural monopoly position to

extract economic rent like a private company would do. It was to subsidize the cost of

living and doing business—to make the economy more efficient, lower-cost, and

ultimately more fulfilling to live and work in.

At issue is the idea that capital investment is inherently private in character. The

national income and product accounts do not recognize government investment even in

infrastructure, to say nothing of subsidies for the research and development that led to

much space and aeronautics technology, information-processing and the internet,

pharmaceuticals, DNA biology, and other sectors that enabled private companies to make

hundreds of billions of dollars.

Simon Patten, the first professor of economics at the nation’s first business

school—the Wharton School at the University of Pennsylvania—explained that the return

to public investment should not take the form of maximizing user fees. The aim was not to

make a profit, but just the reverse: unlike military levies (a pure burden to taxpayers), “in

an industrial society the object of taxation is to increase industrial prosperity” (Patten

1924)7 by lowering the cost of doing business, thus making the economy more

competitive. Market transactions meanwhile would be regulated to keep prices in line with

actual production costs so as to prevent financial operators from extracting “fictitious”

watered costs—what the classical economists defined as unearned income (“economic

rent”).

The US government increased prosperity by infrastructure investment in canals and

railroads, a postal service, and public education as a “fourth” factor of production alongside

7 European governments developed their tax policy “at a time when the state was a mere military organization.” Such states had a “passive” economic development policy, and their tax philosophy was “based upon moral or political ideals,” not economic efficiency.

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labor, land, and capital. Taxes would be “burdenless,” Patten explained, if invested in

public investment in internal improvements, headed by transportation infrastructure. “The

Erie Canal keeps down railroad rates, and takes from local producers in the East their rent

of situation. Notice, for example, the fall in the price of [upstate New York] farms through

western competition” making low-priced crops available from the West (Patten 1924).8

Likewise, public urban transport would minimize property prices (and hence economic

rents) in the center of cities relative to their outlying periphery.

Under a regime of “burdenless taxation” the return on public investment would

aim at lowering the economy’s overall price structure to “promote general prosperity.”

This meant that governments should operate natural monopolies directly, or at least

regulate them. “Parks, sewers, and schools improve the health and intelligence of all

classes of producers, and thus enable them to produce more cheaply, and to compete more

successfully in other markets.” Patten concluded: “If the courts, post office, parks, gas and

water works, street, river and harbor improvements, and other public works do not

increase the prosperity of society they should not be conducted by the State. Like all

private enterprises they should yield a surplus” for the overall economy, but not be treated

as what today is called a profit center (Patten 1924).

Public infrastructure represents the largest capital expenditure in almost every

country, yet little trace of its economic role appears in today’s national income and

product accounts. Free market ideology treats public spending as deadweight, and

counts infrastructure spending as part of the deficit, not as productive capital investment.

The only returns recognized are user fees, not what is saved from private operators

incurring interest charges, dividends, other financial fees, as well as high executive

salaries.

As Patten showed, the relatively narrow scope of “free market” marginal

productivity models applies only to private-sector industrial investment, not to public

investment. (What would the “product” be?) The virtue of this line of analysis is to

point out that the alternative is to promote a rentier “tollbooth” economy enabling 8 Stated the other way around, transportation facilities would increase outlying land prices along the routes. London’s recent Tube extension along the Jubilee Line, for example, inspired a discussion about whether underground and bus transport can be financed publicly by taxing the higher rental value created for sites along such routes. Paying for capital investment out of such tax levies could provide transportation at subsidized prices, minimizing a major element of the economy’s cost structure.

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private owners of infrastructure or other monopolies to charge more than the “marginal

product” actually costs. Stock and bond markets increasingly aim at extracting

economic rent rather than earning profits by investing in tangible capital formation to

employ labor to increase output, not to speak of rising living standards.

Norway’s leading economists half a century ago held views quite similar to that

of Patten. They viewed national savings in the context of the overall “real” economy.

The Oslo [Credit] Channel Model of 1969, Nobel Laureate Ragnar Frisch, for instance,

urged a qualitative approach to credit rather than treating savings and investment as

homogeneous aggregates:

In a decision model it is absolutely inadequate to consider ‘investment’ as some sort of aggregated figure (perhaps to be compared with some other aggregated figure such as ‘saving’). … One of the most crucial aspects in a truly decisional analysis of the national economy is precisely to find out what sorts of investments to make. ... A comparison between different categories of investment must, therefore, stand in the center of the analysis.9 (Frisch 1962)

The conclusion is that “saving for one singular individual and for society as a whole are

two completely different things. They should really not be denominated with the same

term, it is looks confusing. ... It is only by a productive arrangement that society as a whole

can implement saving” (Frisch 1947).

A subsequent Nobel Laureate (1989), Trygve Haavelmo, recalled the logic of

Patten in describing the aim of public investment as being different from that of

individuals or business. The ultimate aim was not to seek profits, but to create the best

economic and social system possible with the resources at hand:

I believe that econometrics can be useful. But… existing economic theories are not good enough. We start by studying the behavior of the individual… We then try to construct a model of the economic society in its totality by a so-called process of aggregation. I now think that this is actually beginning at the wrong end.10 (Haavelmo 1990)

9 See also Frisch (1934). Frisch was the first editor of Econometrica, and took the initiative in founding the Econometric Society in 1930. 10 I am indebted for these three citations to Aron Mond Daastoel (2011), appendix 4 and “Introduction,”

15

National income and product accounts throughout the world suffer from an

ideological distortion in failing to recognize public capital investment, on the logic that it

does not normally make a profit. Tangible investment in the means of production is

recognized only for the private sector. This approach misses the logic that has guided

public capital investment for at least the past five thousand years: the primary function of

public infrastructure investment is different from private-sector investment—namely, to

subsidize the economy and make it more competitive. Economies that privatize their

public sectors tend to be high cost as a result of interest and other financial charges, high

executive salaries, stock options, and other pseudo-costs that add to the price of providing

infrastructure services on a profit (and indeed, rent-extracting) basis.

The problem is that today’s financial markets are not creating new means of

production. The financial time frame is short term, and it is easier to “make money” by

stripping assets and squeezing labor with austerity than to invest in tangible production

and employment. So contrary to expectations half a century ago, financialization today is

going hand in hand with deindustrialization. Not only are Norway’s savings being

financialized, they are being financialized to inflate foreign stock and bond markets—and

now Britain’s luxury real estate market as well.

II. IS IT TIME TO DISINVEST IN THE FINANCIAL MARKETS AND REAL

ESTATE?

Will Norway use its oil fund to promote its own economic development, or will it

continue to put its savings into US and European financial markets in hope that their

central banks may reinflate stock and bond prices? If the latter path is chosen, how

reasonable is it to hope that stocks and bonds will rise in price even as the world

economy slows down? In fact, is putting money abroad really less risky and more

productive than investing it at home? And what of the alternative of buying full control

of Nordic enterprises that may dovetail into Norwegian industrial strategy? Is there in

fact such a strategy—and if not, should there be one?

Prime Minister Stoltenberg defends the Fund’s policy “spreading the risk” over

respectively.

16

a broad array of minority positions. As former Minister of Finance he was a main

architect of the oil fund’s “ budget rule” of not spending more than 4 percent each year

on Norway’s domestic economy—and the other 96 percent abroad! He explains that his

aim of investing in a large “mutual fund” type of portfolio is to spread the risk over a

multitude of minority positions (Stoltenberg 2011). This rules out a more active

forward planning to concentrate investments in strategic resources. He claims that a

more active industrial strategy to concentrate investment in key resources and

technology would increase the financial risk. In a similar vein, a Finance Minister

official claims that future risks are reflected in today’s stock prices. The market is said

to reflect the present state of information so as to have discounted risk at any given

moment in time. This is the claim of the Chicago School’s now notorious (one would

think) “efficient market” hypothesis. The market is supposed to be all knowing. The

inference is that rather than helping domestic Norwegian industry, spending more of the

oil fund’s foreign exchange savings at home would be inflationary and thus would

impair Norwegian competitiveness (Singaas 2011).

If markets really were efficient and with minimum risk, why do they plunge so

sharply? Why were almost three-quarters of subprime mortgages found to be fraudulent

in statistical tests? Why has Wall Street had so many civil fraud settlements running into

the hundreds of billions of dollars? If the financial cycle is lapsing into what Hyman

Minsky called the Ponzi phase (in which banks lend their customers the credit to keep

current on their interest charges), are the system’s managers all knowing in loading

down economies inexorably with more debt—and trying to revive the Bubble

Economy’s financial price gains at least back up to past levels?

These arguments have a touching faith that European and American financial

managers can avoid the present debt overhead from stifling their financial and real estate

markets. Bernie Madoff’s victims certainly were not omniscient, nor were the banks in

Iceland, Ireland, and Latvia—to say nothing of their ostensible regulatory agencies.

Contrary to the “efficient market” hypothesis (the “What, Me Worry?” approach), flow

stock and bond prices reflect primarily the supply of credit—often recklessly abundant.

The US Federal Reserve’s QE2 and Wall Street’s “Plunge Protection Team” has

pumped in hundreds of billions of free dollar credit to overcome gullible financial

17

overindulgence. Markets do not have to be all knowing to make money. What is needed

is simply to have the central bank turn on the credit spigot. But by flooding the economy

with credit (that is, with debt), this policy ultimately is self-destructive. That is why

markets plunged after autumn 2008. Financial power became blind. To assume that it

(“the market”) is “all-knowing” and “efficient” is a travesty of economic reality and the

flow of funds.

This is what now places Norway’s oil fund in jeopardy. The dynamics that have

fueled the 30-year stock and bond run-up since 1980 (and especially since 1990) are

nearing their terminal stage. Economies have become much more highly debt-leveraged,

without using credit to put in place the means to pay it off. It was the exponential rise in

credit that fueled asset-price inflation, enabling debtors to “borrow the interest” by

pledging their “capital” gains to take out ever-rising loans—without actual income

keeping pace. Today, sovereign wealth funds are banking on a renewed rise in financial

asset prices. But this can be achieved only by loading down economies with even more

debt overhead.

This is in fact the aim of US Federal Reserve Chairman Ben Bernanke and

Treasury Secretary Tim Geithner: to rescue banks from their negative equity by

reinflating real estate, stock, and bond markets so as to enable banks, homeowners, and

real estate investors to “earn their way out of debt” by higher asset prices.

This is not the kind of environment that created the half-century of stock and bond

market run-up after World War II ended. That world is over, given the debt corner into

which the bond market, real estate, and stock market have painted themselves. How can

stock and bond prices rise at their former pace in the face of economies buckling under

their debt overhead? Families and companies, cities and states, and even national

governments from Iceland and Latvia to Ireland and Greece find themselves obliged to

pay down debts by diverting their spending away from the purchase of goods and services,

new investment, employment, and consumption.

Bond prices cannot rise further because interest rates have fallen nearly to zero.

From the time interest rates peaked at 20 percent in 1980 through today’s rates of less than

1 percent—the largest decline in interest rates ever recorded—the US and foreign bond

markets experienced the greatest boom of any bond market in history. But there is no

18

further room to decline. And as for high-yield bonds of governments on the brink of fiscal

crisis, it is difficult to see how current risks can be averted, headed by US state and local

debt and that of debt-strapped European countries.

Real estate accounts for 80 percent of bank loans in most English-speaking

countries, and is by far the largest asset category. Investors enjoyed nearly three decades

of being able to borrow to buy properties whose price was being inflated faster than the

rate of interest that had to be paid. Falling interest rates and easier lending terms fueled

capital gains. Consumers refinanced their mortgages at higher debt levels to support living

standards that their take-home pay was not sustaining, as real wages have not increased

since 1979 in the United States.

But since 2008, real estate markets have plunged, leaving a quarter of US real

estate in negative equity, with declines of 70 percent in the Baltics and Iceland. These

market-price declines have prompted banks to tighten their lending terms to require

higher down payments, shorter amortization periods, and—most devastating—honest

appraisals and truthful reports on the borrower’s ability to pay. Without “liar’s loans,”

crooked property appraisals, and NINJA lending (no income, no job, no assets), where is

new credit to come from to bid up housing prices, especially as the overall economy is

shrinking?

Stock markets no longer serve primarily as a vehicle to raise funds for tangible

investment. Instead of expanding production by industrial engineering, “financial

engineering” is a tactic of debt pyramiding (and in due course, fictitious statistical

reporting, Enron-style). Corporate raiders and ambitious financial empire-builders use

high-interest “junk” bonds to buy up other firms and “take companies private” by debt-

leveraged buyouts (LBOs). Financial managers of these firms have run up corporate debt

increasingly to finance stock buy-backs and simply to pay out as dividends to “engineer”

price gains (and hence the value of their stock options).

In short, the stock market no longer performs the functions that textbooks

describe. The stock market has become a vehicle to replace equity with debt. A much

larger value of stocks have been retired than issued over the past three decades. Of the

stocks that remain in the market, corporate managers and venture capitalists on balance

have sold their holdings to pension funds and mutual funds—and to sovereign wealth

19

funds.

When Peter Drucker coined the term “pension-fund socialism” half a century ago,

he expected the stock market to mediate the inflow of pension savings to finance new

investment and hiring to expand the economy. But by becoming a vehicle for corporate

raiding and takeovers, the stock market has been loading companies down with so much

debt that many are now threatening bankruptcy—ironically, as a way to wipe out their

pension obligations, thereby leaving more for the larger creditors to carve up.11

The result is that the industrial sector is using debt creation in a predatory way.

And there is growing awareness that the recent financial crises of Iceland, Ireland, and

Greece are not anomalies but the result of neoliberal tax ideology and central bank policy

that steers savings and credit to inflate real estate and stock market prices, not to expand

direct investment in the means of production. By making interest payments tax

deductible—while taxing “capital” gains at much lower rates than “earned income” in the

form of wages and profits—the tax code makes it easier to make financial gains by

stripping assets than to earn profits by creating tangible real wealth.

In the aftermath of such policy, the US and European economies are transitioning

from a period of asset-price inflation to one of debt deflation in order to pay down the

debts run up over the past financial bubble. Consumers are obliged to cut back spending

on goods and services, prompting businesses to cut back their own capital spending. This

is why today’s economies are shrinking. Every recovery since World War II has started

from a higher level of debt to income and net worth. Under these conditions, banks are

not going to renew the lending policies that fueled the recent financial bubble. They

certainly are not making any more 100 percent zero-equity loans, and are shortening their

time frame to insist on self-amortizing loans.

This is not a positive foundation for a new economic recovery. Falling real estate

prices are deterring new construction, the traditional motor for recovery. Widening state

and local deficits are forcing cutbacks in spending. Family formation, marriage rates, 11 This threat is being used to extract “givebacks,” headed by replacing defined-benefit pension plans with “defined contribution” plans in which all that employees know is how much is paid into the plan each month, not what they will get in the end—if indeed, anything at all remains. The past year, for instance, has seen the Chicago Tribune buckle under its debt-leveraged takeover, in which the real estate pyramider Sam Zell emptied out the Employee Stock Ownership Pension (ESOP) fund to pay off the bankers who lent him the money to buy the newspaper—wiping out stockholders in the process, including the employees. Asset-stripping time has arrived.

20

and birth rates are falling as new graduates cannot find jobs. So in contrast to the Baby

Boom years following World War II and its echo a generation later, the US and

European economies are becoming top-heavy with elderly pension recipients, draining

public budgets.

The Oil Fund’s Diversification into Commercial Real Estate

If financial markets go bad, Norway’s oil fund will fall in value. This has happened to

pension plans and other institutional investors throughout the United States and Europe,

after all. The Japanese started in the late 1980s to diversify their investment into real

estate, using their soaring export surplus to buy Rockefeller Center—and quickly lost

the $1 billion they invested. They also tried to buy downtown Los Angeles, only to find

that “there is no ‘there’ there.” As I will describe below, leading American real estate

developers have been losing their shirts in the recent downturn. One can only pray that

this is not a dress rehearsal for the oil fund’s recent decision to “spread the risk” by

investing in London’s luxury Regent Street trophy stores.

Oil fund managers claim that diversifying out of the stock and bond markets into

real estate minimizes risk. But does it really do this? It is true that real estate has been the

source of most fortunes throughout history, and is the largest asset category in nearly

every economy. But the logic of making money on real estate is different for

governments than for private developers. The latter seek to make capital gains by debt

pyramiding, putting in the minimum of their own equity while paying the rent to their

banker as interest for the loan to buy the property. Bankers search out customers who

have sufficient judgment and vision to take on such loans. Banks get the income, leaving

debt-leveraged investor or other speculators to hope for a capital gain.

Banks have lobbied to make interest tax-deductible. This encourages debt

pyramiding. But the oil fund’s problem is what to do with its surplus of liquid savings.

For it, the way to maximize a return is full equity ownership rather than borrowing—to

get the rental income for itself, not to take out a mortgage and pay the rent to the

banker. How then will it avoid paying taxes on its rental income?

Multinational firms solve this problem by establishing banking subsidiaries to

lend enough money to their real estate, mining, oil, or other companies to “expense”

21

whatever income they earn in the form of interest charges. This gives the illusion that

the conglomerate is not earning any net taxable rental income. Is Norway’s oil fund

prepared to establish a banking affiliate to engage in this kind of ploy to avoid having

to pay income taxes.

There are other dangers. The past two years have seen real estate losses as

steep as 70 percent in the former “tiger” economies of Latvia and Iceland, and 30

percent in the United States, where property prices are still plunging. For example,

the largest real estate rental development is Stuyvesant Town in New York City. In

2006, Tischman-Speyer organized a group of investors to buy it for $5.4 billion. The

investors ended up simply walking away from the property when its value fell an

estimated $1.9 billion and went into foreclosure.

In the commercial property sphere, the debt-leveraged empire of Harry

Macklowe, one of New York City’s largest developers, also imploded last year.

Donald Trump often has lost money and defaulted on his real estate loans, and the

Reichmann brothers of Canada lost their equity in London’s Canary Wharf. So it may

be a case of jumping out of the frying pan into the fire for oil fund managers to

diversify out of stocks and bonds into real estate.

It should be borne in mind that real estate investment is an inherently political

game, best played by insiders when it comes to trophy properties. The biggest gains are

made from rezoning property use. Tischman-Speyer, for example, expected to make its

gains by evicting rental tenants from Stuyvesant Town and turn it into condominiums

for sale. But politicians simply could not permit investors to act in so blatantly illegal a

way against so many residential voters. Is Norway’s government prepared to pay off

politicians and judges, at least by financing their election campaigns to obtain such

favors as rezoning and tax favoritism—and the local transportation and other

infrastructure investment that often is a key to raising property values?

The moral is that diversification into real estate in a risky financial environment

does not minimize the risk; it only spreads it around. So today seems a propitious

moment to reconsider just how sovereign wealth funds should best invest in foreign

markets, especially as Europe is being racked by Baltic, Irish, and Greek negative

equity and austerity.

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III. NORWAY’S BROAD SET OF CHOICES TO POSITION ITSELF FOR THE

FUTURE

Today is one of those crucial moments in history when the shape of world development

is being reset for the next few generations. The BRIC countries, South Africa, and Asia

have become the main recipients of US and European capital flight, in no small

measure because they are using their sovereign wealth funds to modernize their

transport and communications infrastructure, health systems, research, and education.

They also are buying control of key raw materials and technology most directly

integrated with their own regional advantages. Rather than being inflationary, this

investment in their own economies and those of their neighbors lowers their cost of

living and doing business.

The aim of this “new” policy recalls the mercantilist strategy that underlay

British, German, and US development in past centuries, as noted above.12 Its success is

leading the world to polarize between nations whose governments actively manage their

long-term investment and those that place their funds in scattered financial markets. This

is the ground on which Mr. Primakov recently explained (in the interview cited earlier)

why governments need to draw up a long-term strategic development plan to position

themselves in the world’s shifting specialization of production and employment, “If a

plane is having trouble, the autopilot cannot handle an unusual situation. Only the

personal skills of the pilot can save the ship. It is similar with the economy. Autopilot

does not work in extreme conditions.” By “autopilot” the former Prime Minister meant

passive financial investment policies. He recommended dividing Russia’s sovereign

wealth fund to establish a Fund for Well-Being alongside the Stabilization Fund.

To put Norway’s investment strategy in a similarly broad economic perspective,

let us ask why countries with much more active sovereign wealth funds are becoming

such strong magnets for capital. What are they doing that the United States and Europe

are not?

For starters, there is an assumption that the oil fund’s proper aim is strictly

12 Here in Norway, Erik Reinert’s “reality economics” group has described this “other economic canon” as an alternative to today’s more short-term bankers’-eye financial view of comparative advantage. See: http://www.othercanon.org/papers/index.html.

23

financial, not to position Norway’s economy strategically for the remainder of the 21st

century. But today’s post-bubble reality check suggests that the scope of Norwegian

policymaking should go beyond merely picking stocks and bonds to weather the

global financial storm. The basic issue is whether the nation should save its oil-export

revenue in merely financial terms—and as such, compete with “free” electronic credit

abroad. Should Norway continue to turn the oil fund’s foreign currency receipts over

to financial planners to treat like a small-scale personal savings account placed in an

array of mutual funds?

The alternative is to use its oil revenues to buy resources and technology most

closely related to developing its own economy so as to make future generations self-

sustaining by living off their own work and production. China’s investment in foreign

technology, mineral resources, and farmland exemplifies this approach. Its purchase of

Lenovo (formerly IBM), Volvo, and Norway’s Elkem are examples of how such

investment may dovetail into long-term geopolitical planning—evidently to the approval

of Western money managers.

When the sovereign wealth funds of China or Singapore do invest in stocks, it

usually is in partnership with well-connected hedge funds and political insiders. China’s

$3 billion buy-in to Blackstone in June 2007, followed by its purchase of 9.9 percent of

Morgan Stanley that December, aimed at integrating its investment strategy with

America’s economic elite. Russia’s investment in the former Soviet oil industry and

transport is a similar example. The government is trying to buy back the former Yukos

ownership of Lithuania’s Mazeikiu refinery.13

The key factors of production in today’s world are natural resources, one’s own

domestic labor and capital, and the ability of governments to protect economies from

predatory finance. Norway’s interest lies in resisting pressure to exchange its valuable

oil and other resources merely for IOUs in “paper currencies” (that is, unpayable foreign

debts), stocks, and bonds that look like they will decline in value against “real”

resources.

But Norway is not playing the global financial game to maximize its advantage as

a global creditor. Its oil fund simply recycles its foreign-currency royalties into European

13 See: http://www.globalpost.com/dispatch/poland/101014/lithuania-oil-refinery-russia.

24

and US financial markets, despite the debt deflation and economic austerity into which

their governments are plunging their populations. The fact that Norway’s own economy

is free of the need for such austerity should provide an opportunity for it to use its oil-

export surplus to invest directly in domestic and regional enterprises and infrastructure to

prosper over the next half-century.

Some economists almost jokingly suggest that if Norway cannot spend its export

earnings on capital investment at home, it should simply leave the oil in the ground. Their

oil provides other countries with heat and power—and then uses the savings from this

production to bail out overextended financial and real estate markets abroad. This enables

property and financial speculators to “cash out”—leaving the oil fund holding an empty

bag if financial markets decline. US and European financial managers are to receive not

only the gift of Norway’s oil, but also its earnings in the form of inflows into the stocks

and bonds of these countries at high prices. This game may leave Norway with empty

holes in the ground and suffering losses of its savings.

So the guiding principle when it comes to savings in financialized form may be

“use it or lose it.” Suppose the oil fund is risking half its financial savings—a quarter-

trillion dollars. Is it not better to hope that future generations may find it easier to resist

subsidizing the global financial casino as it slides into negative equity?

A less drastic solution would be opened up by the kind of discussion cited earlier

from Alaska and Alberta to Russia as to how best to invest national savings. What are

Norway’s most pressing needs and most promising opportunities?

Heading the list would be modernizing its railway and transport system, and

expanding its fishing industry. Transportation saves time, and “time is money”—or at

least can be expressed in terms of the value of time spent on slower or less efficient

transportation. At a time when debt-pressed governments are turning their roads into toll

roads and thereby raising their cost of living and doing business, Norway’s financial

position enables it to save such charges.

Most countries seek to make themselves more competitive, but few Norwegians

would want to do this by lowering basic wages and living standards as is occurring in

debt-strapped economies. Education and training obviously are a key element of

competitiveness, but not at the “neoliberal” cost of loading down students with a lifetime

25

of education debt. Norway has the resources to subsidize its education while other parts

of the world are sharply raising its price.

In contrast to today’s “race to the bottom” based on lowering wage levels, Simon

Patten (1890) explained the Economy of High Wages principle: high-wage labor

undersells “pauper labor” because it is highly educated, well-clothed, and healthy. “If we

show the world how a people can become educated, how skilled labor can be placed and

maintained in all industries, how the consumption of the people can be modified so as to

make the best use of its land, and how all forms of internal improvements can be

successfully inaugurated and carried out, other nations will be compelled to follow in

our footsteps and displace that mass of cheap laborers which now retards the

development of every nation.”14

Today, financial, insurance, and real estate (FIRE) charges play a much greater

role in personal budgets than in times past. These charges are institutional in character,

subject to domestic tax and financial policy. In Patten’s day, countries normally lowered

production costs by raising the productivity of capital, above all as a result of rising

energy use per worker. They also raised their competitiveness by subsidizing the basic

infrastructure sectors cited above: transportation, communications, R&D, and a good

university system. By contrast, today’s neoliberal “reform” policies promote debt

leveraging and untax real estate—leaving more economic rent to be capitalized into

larger bank loans and thus absorb the economic surplus in the form of interest charges.

A sounder and fairer financial-fiscal policy can minimize these FIRE-sector overhead

charges by reintroducing classical free-market policies: markets free of economically

unnecessary financial, rent, and monopoly charges.

The aim of development planning is to transform the character of international

advantage and the relations between labor and capital. Countries can self-endow

themselves with capital and high productivity. So international cost advantage need not

involve the “race to the bottom” that creditors are imposing on the Baltics, Southern

Europe, and other debt-strapped economies. Nations seeking to build up their future may

14 I elaborate this principle in America’s Protectionist Takeoff: 1815-1914 (2010) and Trade, Development and Foreign Debt (2009), but I am indebted to Arno Daastol for bringing my attention back to this quotation, and for much background information on Norway’s oil fund that I cite in this paper.

26

well aim not to be “competitive” in a world in which neoliberal managers are trying to

“win” by driving down wages and living standards.

For Norway, the aim should be to maintain prosperity when its oil runs out, by

putting in place knowledge and technology, a well-educated population, and a low-

interest infrastructure. Instead, Norwegians are now being told not to spend on their

economy much of the gain from their hard labor and enterprise invested in oil extraction,

technology, and their “gift of nature.” Contrary to the policy of sovereign wealth funds

in the economies that the world’s money managers are moving their own money into,

Norway’s financial managers claim that it would be inflationary and wasteful—and

actually make the economy less competitive—to spend more of the oil fund’s revenue

and reserves on importing technology, capital goods to build better roads and modernize

the nation’s railroads, or on direct investment in Norway’s closest neighbors, from

Iceland to Scandinavia and perhaps the Baltics.

The basic ideas of Norwegian economic interest have not changed much over

the centuries. For many centuries it vied militarily with its neighbors to control the

North Sea fisheries. This rivalry prompted Britain to colonize New England,

Newfoundland, and Canada to obtain cod and similar “northern” raw materials at

minimum balance-of-payments cost by keeping the payments for these commodities in

sterling rather than being paid to Scandinavia. But today, control of resources is being

achieved financially. This enables Norway to improve its geopolitical future not in an

aggressive way but one that its debt-strapped neighbors from Iceland to the Baltics

would welcome, as Norway has a number of natural complementarities with these

countries.

Some Asian friends of mine have asked why Norway doesn’t use its oil fund

reserves to buy into Sweden’s high-tech sectors, or Latvian computer programming and

software sectors. Icelandic economists have pointed out that in the aftermath of the

banking crisis, their pension funds bought many of the country’s crown jewels from the

bankrupt institutions. For instance, one business currently said to be up for sale is

Iceland’s largest fish processing plant. The philosophy of Icelandic pension fund

managers is much like that of Norway’s oil fund: they do not feel that they are well

organized to directly manage companies. So they are looking to sell off major

27

infrastructure and businesses they obtained from the banking crisis.

So here is where the prospective debate over how best to use Norway’s oil

revenues stands. The foreign exchange from oil remains wholly invested abroad—

except to the extent that it might be spent on buying control of foreign assets and

resources plugged into domestic Norwegian growth, or spent on imports (earth-moving

equipment, steel, etc.).15 This is because oil royalties are paid euros or sterling. The

objective of keeping the oil fund in foreign currency is to prevent driving up the

kroner’s exchange rate to levels that would make its labor and industry uncompetitive.

The Finance Ministry claims that using more foreign exchange proceeds to import

technology and capital goods for domestic spending is inflationary, simply because it

employs labor. This is the ground on which Norway’s financial managers limit oil fund

spending within the country to just 4 percent of the annual returns. The announced aim

is to avoid converting oil export proceeds into domestic currency and thus pushing up

the exchange rate. It is argued that this policy avoids overheating the labor market,

pushing up wages, and thus making Norwegian business uncompetitive.

But the world’s most successful sovereign wealth funds are pursuing the policy

that the past few centuries of trade and development theory have upheld: economies are

made more competitive and less inflationary by public investment in infrastructure and

education to raise productivity and to lower the cost of living and financial or other

rentier overhead charges.

This means that the most pressing present problem in oil fund debate is to expand

its scope to acknowledge the broad issues that are being raised in the rest of the world. It

may be time to establish one or more Futures Institutes to assess possible Norwegian

futures in today’s rapidly shape-shifting global economy.

I would suggest framing the basic research problem as follows: suppose that the

oil fund be shifted over the next twenty years to invest 60 percent of its assets in projects

that serve Norway’s national interest, by a combination of direct foreign resource and

enterprise ownership and domestic infrastructure. To answer this question, one might ask

15 The only oil fund money that is spent in Norway has been for imported equipment and other goods and services. When the oil companies exchange their foreign exchange for kroner, Norges Bank gets the euros or other foreign currency. It then creates domestic kroner on its own electronic keyboard. So the money spent domestically in Norway comes from the central bank keyboard, not from the oil fund.

28

what benefits the national economy would achieve by high-speed railway, better public

roads and tunnels, internet and phone communication, higher education at home and

abroad, healthcare, ports, and fisheries.

29

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Economic Planning Studies: A Collection of Essays: Dordrecht and Boston: D. Reidel Publ. Co.

Haavelmo, T. 1990. “Econometrics and the Welfare State, Banquet Speech, at the

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Patten, S.N. 1890. The Economic Basis of Protection. Philadelphia: J.B. Lippincott

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in Economic Theory. New York: Knopf. (Originally in Publications of the University of Pennsylvania Political Economy and Public Law Series 3(2), 1892).

Singaas, H. 2011. “Pensjonsfondet sett hjemmefra.” Dagbladet, February 22. Available

at: http://www.regjeringen.no/nb/dep/fin/aktuelt/taler_artikler/taler_og_artikler_av_ovrig_politisk_lede/taler-og-artikler-av-hilde-singsaas/2011/pensjonsfondet-sett-hjemmefra.html?id=634461.

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